Winona Nava, president and CEO of Santa Fe-based Guadalupe Credit Union, says that proposed Consumer Financial Protection Bureau rules should help protect against payday lenders who charge 300 to 500 percent annual interest rates for short-term loans, instead of less expensive short-term loans that small financial institutions provide.
A proposed new rule from the Consumer Financial Protection Bureau may help protect people against predatory lenders, but could come at a cost for New Mexico credit unions and small banks.
The rule, announced in early June, would designate it an “abusive and unfair practice” for lenders to make short-term loans without determining that a consumer has the ability to repay it.
Lenders would be required to increase compliance checks and verifications on two types of loans. One is short-term loans that can include 14, 30, and 45-day terms with or without a vehicle title as collateral. The other includes longer-term loans where the annual interest rates exceed 36 percent, and there is a lien on a vehicle or some form of “leveraged payment mechanism.”
Those types of mechanisms often include initiating automated transfers and withdrawals from a bank account, and paycheck deductions.
Paul Stull, CEO and president of the Credit Union Association of New Mexico, says that while there is good reason to curb predatory payday lending, casting an overly broad net that includes credit unions and small banks doesn’t make sense.
“It’s calling for doing more underwriting, complying with more regulations, increasing the number of forms, and increasing the number of compliance supervisory checks and double checks that go into this,” said Stull.
Those checks could include things like requiring a lender to verify a person’s net income, current debt obligations using credit reporting, housing costs, basic living expenses, and project someone’s items for a period of time-based on the term of the loan.
Jerry Walker, president and CEO of the Independent Community Bankers Association of New Mexico, said the organization plans to submit comment to the CFPB, and noted that the high cost of enforcement would likely be prohibitive to small banks.
“Many of our members will simply withdraw from this activity if the compliance costs and potential for unwittingly violating this rule were to exist,” said Walker.
Part of the business model of smaller financial institutions includes helping borrowers avoid or pay off predatory loans elsewhere, but this ruling could hurt that, according to Guadalupe Credit Union President and CEO Winona Nava.
“Our $300 over six months payday loan alternative would be covered [by this rule],” said Nava, “I calculated APR around 45 percent including the $20.00 application fee. …it’s confusing why, in an attempt to stop lenders from charging in the 300 to 500 percent range, they are in essence blocking products that can improve lives and financial well being.”
Payday lenders and others who offer short-term loans have come under increasing scrutiny. CFPB released data in April that indicated many payday lenders’ collection practices lead to multiple overdrafts and late fees, and in some cases trigger account closure. Google also announced in May that it planned to ban advertising on its site for short-term loans as of July 13.
Credit unions’ annual cost compliance cost for federal regulation tops $7.2 billion nationally, including $57 million that New Mexico institutions pay, according to Stull.
